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Reliance: Refining push

Reliance Industries announced its quarterly results registering a 17% rise in topline while bottomline improved by about 20% during the same period. Increased volume sales were the key reason for the company's performance. Lets take a detailed look at the company's 1QFY04 performance.

The company has reported higher volume sales in polymer products, though the demand of poly staple fiber, polyethylene terephthalate and poly filament yarn saw a decline. In case of petroleum products, the volumes have increased during the quarter primarily on account of petrol, diesel and LPG sales. Though the realisations from petrochemicals saw a decline during the quarter, the same from petroleum products was higher YoY. Higher exports also added to the growth in bottomline. Going forward, an upturn in the petrochemicals cycle is likely to benefit the company in terms of higher realisations.

(Rs m)

1QFY03

1QFY04

Change

Net sales

106,500

125,010

17.4%

Other Income

2,010

1,870

-7.0%

Expenditure

85,980

102,130

18.8%

Operating Profit (EBDITA)

20,520

22,880

11.5%

Operating Profit Margin (%)

19.3%

18.3%

Interest

4,070

3,490

-14.3%

Depreciation

6,460

7,000

8.4%

Profit before Tax

12,000

14,260

18.8%

Tax

2,820

2,460

-12.8%

Extraordinary expenses

760

Profit after Tax/(Loss)

9,180

11,040

20.3%

Net profit margin (%)

8.6%

8.8%

No. of Shares

1,396.0

1,396.0

Diluted Earnings per share*

26.3

31.6

P/E Ratio

11.3

*(annualised)

Expenses of the company have also increased with the increase in topline. Though raw material, which is a major component of expenses, has declined as a percentage of net sales (from 75% in 1QFY03 to 68% in 1QFY04), the total expenses have witnessed a marginal 1% increase. This increase in total expenses as a percentage of net sales is on account of increase in stock in trade, which has resulted in a decline in operating profit margin by about 100 basis points.

If one were to look at the segment wise breakup, total revenues from refining segment increased at a higher rate as compared to revenues from the petrochemicals segment. However, when one looks at the PBIT break up, the picture becomes clearer. While the PBIT from the petrochemicals segment witnessed a decline of about 28% that from the refining segment have improved significantly by about 84%.

Segment-wise snapshot - Refining saves the day

(Rs m)

1QFY03

1QFY04

% Change

Petrochemicals

6,566

6,939

5.7%

PBIT margin

12.4%

8.5%

Refining

8,697

9,373

7.8%

PBIT margin

5.0%

8.5%

Others

313

854

172.8%

PBIT margin

43.8%

19.4%

Total revenues

15,576

17,166

10.2%

Overall PBIT margin

8.9%

9.1%

The realisations from petrochemicals have gone down on account of lower product prices during the June quarter. However, since the prices have started moving north, we expect that the realisations from this segment will increase going forward. In case of refining, the prices of petroleum products were higher as compared to the same period last year, which resulted for growth in this segment. However, the scenario may get reversed going forward if the petroleum product prices sustain at the current levels.

Reliance has managed to reduce its interest outgo by about 14% and this has further aided bottomline growth. Thus, increased volumes and higher realisations from refining segment helped Reliance to increase its bottomline whereas petrochemicals segment curbed the bottomline growth to some extent. Consequently, bottomline grew by about 20%.

At Rs 359, the stock is trading at a P/E multiple of 11.3x its annualised 1QFY04 earnings. The petrochemical cycle is on an upturn and this apart, the natural gas discovery promises lot of potential for the company going forward. The company has plans to increase its petrochemicals capacity by about 10% and this will further help it capitalize from the cyclical upturn. Its entry in the marketing of petroleum products will further help it realize the benefits of integration. Huge capex (Infocomm) undertaken by the company have not bore fruits yet and this has to be looked at as a cause of concern. Also, the shareholding structure between various new initiatives is complex.

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